By Stephanie Yates
The New Year is such an exciting time. We pause to look back at all that we achieved in the year before and make plans to move forward in the coming year. It is almost as if each year gives us a new opportunity to reinvent ourselves. If you could “reinvent” or even “re-engineer” your finances, what would that look like? What changes would you make? Have you thought about where you could make improvements?
This month, let’s think about improving our financial condition by creating wealth. Wealth differs from income in that wealth enables you to maintain your lifestyle without receiving any additional compensation. The longer you can maintain your lifestyle without working, the wealthier you are. Income, on the other hand, is the regular cash flow you receive from work or passive sources such as investments. Therefore, although the two concepts are different, they depend on one another. Unless you are born wealthy, you will need to have an income in order to build your wealth. However, wealth does not depend upon your income alone. How you manage that income with respect to spending and saving matters as well. What this all means, then, is that creating wealth is a function of income, spending, and saving. Let’s talk about each of those elements in turn.
Earning Income to Create Wealth
Based on our definition of wealth, you can become wealthy regardless of the size of your income as long as you manage your spending and saving. However, the greater your income, the easier it is to create wealth. How can you increase your income in order to create wealth? Here are a few suggestions:
1) Ask for a raise. You may think this is crazy, but it’s so crazy that it just might work. Are you being paid appropriately for the work that you do? Conduct your own research regarding average salaries and compare your own salary to those averages. Websites like salary.com are a great place to start. If your pay is below average, consider asking for a raise or even finding an employer who will pay you the going rate.
2) Do odd jobs. Do you have a special talent or expertise? If so, maybe you can hire yourself out to make a little extra cash. What services could you offer for a fee?
3) Turn your hobby into a business. Do you like to create or “tinker” in your spare time? Is there a way that you can turn that hobby into a business? That is, would others be willing to pay you for the work that you produce? What goods can you produce and sell?
4) Take on a part-time job. This may require a higher level of commitment, but if you have open hours in your schedule, maybe a part-time job can fill the void and fill your pockets! Also, consider jobs that offer a benefit such as a discount, free admission, or something else of value to you.
5) Invest. You can also earn income passively. Do you have extra cash available for saving and investing? If so, consider putting that cash to work for you. This may require you to do some research or get advice, but as we get older, it’s ideal for us to earn more of our income through passive means than through active ones.
Spending Wisely to Create Wealth
You absolutely have to have a spending plan. There’s just no way around it. A spending plan outlines how you intend to spend your income on a regular basis. You can change your spending plan as your situation changes, but you absolutely have to have a spending plan. Without one, it is very easy to waste money through mindless spending. A great way to start is to simply think about your expenses in three categories: Needs, Wants, and Savings and/or Debt Repayment. Of course, this will require you to distinguish between needs and wants! This is the basis of Elizabeth Warren’s guidance in her book, All Your Worth, and she recommends that your allocations should be 50 percent, 30 percent, and 20 percent respectively. It may take you some time to get to the 50/30/20 split, but following that guideline gives you a goal and a focused way of thinking about your spending.
Saving and Investing to Create Wealth
Finally, if you are earning all the income that you can and spending it wisely, you should have money left to save. This final step in wealth creation is critical. This is how you make your money grow and also how to measure your wealth. Do you know your current net worth? That is, if you add up the value of all of your assets and subtract off all of your debt, what is left? Knowing your net worth is an excellent starting point on your journey to wealth.